Many aspiring entrepreneurs are misled into pursuing a capital investment without taking into account financing, which is the key component that gives your company its ability to grow. The majority of start-ups I come across look for capital without taking the necessity of financing into consideration.
I have learned this lesson like I have learned most of my lessons, ‘the hard way’, when Gary and I started our first business in college in 1991. The following story should give you a clear idea why you should never use capital to chase your growth.
A personal Story
Gary and I started our first business (clothing brand) back in 1991 when we landed a ten-store test order from a national chain that had about a thousand stores across the country. When we got the order, we somehow managed to raise some quick money in order to get some temporary office space to work out of, pay for the product to be made, get a UPS account, buy shipping and packing supplies, make some signage for the stores, etc. etc. It took us about $30,000 or so to set ourselves up just to get started.
The result? We received a re-order for 200 stores. Great news, huh? Not so much… Just like the first order, we hadn’t prepared how we were going to get the money to pay for the production of the new order, only this time the order was twenty times the size. Furthermore, we had to find a supplier with more machines, get a warehouse to store more product, hire people to pack and ship the product, make more signage, etc. etc. What’s more, I had to travel around the country to try to merchandise our product. Merchandising the stores for the first order was pretty easy to do as the test order was only in their Colorado locations so it was just basically a lot of driving. This time, however, I had to fly all over the country to try to locate and merchandise our product. So what did we do? Well, naturally, we feverishly raised more capital. This time, it was over $100,000.
Problem solved? Not so much…Unfortunately, the product didn’t sell, as I could not catch up with the merchandising as there were just too many places to cover in too short a period of time, so our product got lost in the stores and the account started canceling orders left and right. By then, we had gotten a bigger office, a bigger warehouse and made some inventory to prepare us for the next order. Typically, raising overhead a bit to reflect growth is relatively par for the course, but not when you go on a suicide mission and have only one account! For more on that, read this article on what not to do in business . Keep in mind, however, that overhead kills businesses so you have to take that statement with careful consideration.
Back To The Starting point
So now we were back to the starting point with huge overhead pressing us into the corner and no orders in sight. So what did we do? Well, for one, I put up my car for a loan from the bank and started looking to give away emergency equity for cash to pay the bills. Furthermore, we desperately needed money to go to tradeshows to get new accounts. Translation? More money.
So we got more money. Not easy, but we got it. $50,000 here, $30,000 there, it was a constant fundraising campaign as it seemed we spent more time trying to get money to grow the business then on the business itself. So we went to the shows to try to get new accounts and what happened? We wrote a ton of business. Great news! Again, not so much…
The Saga Continues
Now, we were in it deep. This time, we needed another $100,000 or so for just the fabric alone, let alone the money to make the garments, warehouse the products, and the many other expenses associated with the orders. So not only did we raise more capital, but we also convinced suppliers into giving us bigger credit lines so we could fulfill our orders. So now we were taking on debt as well.
This craziness went on for nearly six years until we finally came across an order that was too big for us to handle. We ended up missing an entire season and, when it was all said and done, we were left with nothing. What’s more, since we weren’t shipping anything, both our overhead and our debts from suppliers who had given us credit lines caught up to us and we were forced into both personal and corporate bankruptcy.
Are you getting the point here? If you don’t, let me be clear. You don’t use capital to chase your growth. This is especially true for a product driven model when inventory is involved.
This is the beginning of a series of posts that discusses tips to raise capital , the importance of securing financing, and the benefits of forming strategic partnerships. The purpose of this post was simply to wet your beak a bit and give you an example of when money can be used the wrong way.
If you are a regular on the N2ITIV blog, you know that learning what not to do in business is, in my opinion, the best way to teach entrepreneurs. Having learned from the utter destruction Gary and I had in our first business, hopefully, when you do raise capital you will steer clear of making the same mistakes we made. Believe me, it is much better to learn from someone else than to go through it yourself.